Syndicated loans feel the bond market heat

Turkey’s banks have issued syndicated loans with great aplomb in the last 18 months, having found other debt markets shut to them. Now they are looking to move up a level, into the Eurobond market. As Paul Wallace reports, capital markets investors are likely to find Turkish financial institutions just as enticing as lenders in the bank market do.

  • 10 Jun 2010
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Turkey’s banks are probably wondering what all the fuss has been about. While turmoil swept through global debt markets in late 2008 and the first half of 2009, they were still able to tap the syndicated loan market with ease, raising billions of dollars between them. Of course, pricing had widened and their syndicates comprised slightly fewer lenders than they were used to. But in comparison with other emerging market financial institutions, Turkey’s were still highly popular with international investors. That they would be able to issue deals never seemed in doubt.

The main reason for this was the Turkish banking sector’s stellar performance during the worst of the financial crisis. The seeds for this strong showing were sown in response to the country’s own crisis of 2001, when a run on the lira triggered chaos in a banking system plagued by poor management, soaring bad loans and high foreign currency exposure. The experience of this — which forced the government, with the help of the IMF, to recapitalise and restructure the system, with several of the worst hit banks wound down — proved crucial in 2008.

"Turkey’s crisis in 2001 taught the country a lot of things," says Özlem Cinemre, head of Finansbank’s international division, in Istanbul. "The banks are now much better run. The lessons that were learnt in 2001 became very useful during the latest financial crisis."

Importantly, financial regulation was continually strengthened, even when the economy boomed between 2003 and 2008. Turkey’s watchdog, the Banking Regulation and Supervision Agency (BRSA), hiked banks’ minimum capital adequacy ratios (CARs) from 8% to 12% and made them double the reserves set against their loan portfolios.

Such policies, at a time when less pre-emptive regulators elsewhere were moving in the opposite direction, were not exactly popular with bankers. But most now admit they were sensible. "Sometimes we suffered from overregulation," says Aykut Demiray, deputy chief executive of Isbank, in Istanbul. "Many of the regulator’s moves weren’t popular. But we’re pleased about them now. They led to Turkey’s banks being very strongly cushioned going into the latest financial crisis."

Turkish banks had to change their business models in response to the 2001 crisis. They shifted focus from short-term profits to retail banking and foreign currency lending was slashed. "The greatest advantage of Turkish banks is that they focus on real banking," says Tolga Egemen, executive vice president at Garanti Bank, in Istanbul. "We’ve never been involved with toxic assets. We’ve had the discipline to stick with core banking — the type that people in the US and UK used to say was boring. We’ve done this since 2001 and have generated sustainable revenues as a result."

NPLs were no sweat

Political stability was also crucial. The Justice and Development Party (AKP) has been in power since 2002, before which Turkey suffered from a long era of short-lived coalition governments. "If we hadn’t had stable politics since 2002, I don’t think we would have come through the crisis like we did," says Tanju Yüksel, assistant general manager at VakifBank, in Istanbul. "Having a reform-oriented stable government allowed investors to take a long-term view and make long-term investments in Turkey."

Another Turkish banker says: "The 2001 crisis triggered so many changes. Luckily, because of the political stability, we were able to implement what was necessary. And we never let up, which wouldn’t have been the case if we’d had a new government every 18 months."

Turkey’s banks thus entered the crisis in an enviable a position. Almost all were well capitalised and had no concerns about liquidity. The capital adequacy ratio of Turkish banks at the end of 2008 was 18%. Moreover, almost all of this was tier one capital, given how little subordinated debt they had.

The banks were not immune from Turkey’s recession that started in late 2008, however. Non-performing loans rose from 3.7% at the end of that year to a peak of 5.3% in September 2009, according to the BRSA. However, the situation was nowhere near as bad as 2001. "The major contraction in the economy hurt Turkish banks," says Gülçin Orgun, director of Fitch’s financial institutions team in Istanbul. "But the deterioration of their assets was much slower and more limited than it was 10 years ago. Then, NPL ratios were as high as 25%."

Turkey has also suffered less than other emerging markets. In a report in late April, Fitch said the impaired loan ratio in Turkey (which had fallen to 4.9% by the end of March) was lower than those in almost all its neighbours in central and eastern Europe, and also those in Russia, Brazil and South Africa.

Turkey’s banks have only been strengthened by relying so little on debt markets for funding. Thanks to their conservative business models, their loan to deposit ratio was a low 82% at the end of March this year, according to the BRSA. For their funding they mainly rely on diversified deposits bases, which have been stable. Wholesale markets account for only about 10% of the liabilities of the biggest banks. "Turkish banks are self-sufficient in terms of funding," says Garanti’s Egemen. "We are not dependent on international wholesale markets. If we had been, we’d have suffered a lot, just as those from the likes of Kazakhstan and Ukraine did."

They love them loans

Syndicated loans have, however, remained popular. Throughout 2009 Turkey’s banks relied on such borrowing — and, to some extent, multilateral deals from the likes of the European Investment Bank — for their medium-term funding. Access to bond and securitisation markets was out of the question.

Turkey’s top tier banks have, for the last three years, tended to tap the loan market twice annually, each time rolling over their existing facilities with new one year deals, which are always self-arranged and put together as tiered clubs. Their ability to issue did not wane even at the height of the crisis in late 2008, when most were able to achieve rollover rates of over two-thirds. But, thanks to the loan market’s improvement, demand grew markedly throughout 2009 and pricing narrowed. The benchmark margin for Turkey’s top tier banks (which all price at around the same level) was set at 250bp all-in in April 2009, but had fallen to 200bp by the end of the year.

That trend has continued in 2010. By the end of May five of the most regular top names — Akbank, Garanti, Isbank, VakifBank and Yapi Kredi — had tapped the market, each of them paying 150bp all-in for their one year money. And, despite pricing narrowing by a hefty 50bp from the last time they had issued, the results were spectacular. Akbank, which was replacing a $615m facility, raised $1.2bn (split between tranches of $437.5m and Eu584.5m) from 55 banks. "Syndicates that big had been unheard of in Europe, the Middle East and Africa since the start of 2009," says a senior emerging market loans banker.

Garanti also raised more than $1bn, but scaled back lenders to sign at $925m. And Yapi, Vakif and Isbank signed respective deals of $1bn, $945m and $900m.

Demand has not been confined to Turkey’s biggest lenders, either. Several smaller ones have issued deals this year. Alternatifbank signed a $150m one year facility paying 210bp all-in in May, after setting out to refinance a loan totalling just $71m. And in the same month Export Credit Bank of Turkey (Turk Eximbank) obtained a Eu150m one year deal, understood to pay 195bp all-in. There has also been a rare Turkish Islamic loan from Bank Asya, which proved particularly popular with local and Middle Eastern lenders. The borrower launched its Murabaha facility at $75m but signed it at $255m after a big oversubscription.

The level of demand for all these deals surprised many bankers, and even some of the borrowers. Retail investors were all but absent from EMEA’s loan market at the start of the year. But they flocked to Turkey’s deals even though financial institutions, especially those in emerging markets, were still viewed with trepidation by most loans houses.

Stingy but popular

All the more impressive was that Turkey’s banks hardly paid generously. In particular, the top tier borrowers, almost all of which have low triple-B or double-B ratings, pay far less than comparable credits elsewhere in EMEA. African Export-Import Bank (Afrexim), rated BBB- by Fitch, paid 325bp all-in for a one year loan signed in May, more than double what Turkey’s FIs pay, despite being a supranational borrower. And Russia’s Promsvyazbank, rated Ba2/-/B+, signed a one year loan in early June that paid as much as 430bp all-in.

Instead of yield, most lenders commit to the deals because of a relationship pull. "The banks aren’t just relying on the paper return," says a banker in Istanbul. "They also get trade finance, treasury, payments and advisory business. There is so much ancillary business they can get. They live with a lower return as they generate revenues elsewhere."

Almost all borrowers in the loan market claim to provide plenty of side business. But Turkey’s FIs are widely acknowledged as being among the best at keeping their banks happy. "Turkish banks should be case studies in how to manage relationships. They are masters of it," says Hiren Singharay, head of syndications for Europe, Africa and South Asia at Standard Chartered in London.

Unusually for emerging market borrowers, Turkey’s monitor exactly how much side business they direct to each bank in their syndicates, via their management information systems (MIS). "Turkish banks are the only borrowers I’ve known that have a specific record of all the ancillary business they’ve given you," says Singharay. "They look after you. It’s a proper relationship.

"Compare this with the behaviour of some other financial institutions. All they want is your money! That’s why they pay more compared to their ratings."

The bulk of the ancillary business goes to the mandated lead arrangers on each of the syndicates, a group usually about 10-20 strong. But even banks at the bottom — those who commit only $5m or Eu4m, say — are unlikely to be left out, especially if their countries trade with Turkey. And because Turkey’s borrowers are so experienced in the loan market — they have been tapping it regularly for about 15 years— they have few problems coping with such large groups of lenders. "We have enough resources and people to manage our relationships, even with a syndicate of 50-plus banks," says Isbank’s Demiray. "We’re very experienced with this. It’s no problem."

Turkey’s FIs also attract commitments by making it clear that there will be no ancillary business for those who do not support their loans. "If banks want to continue doing business with us, they have to lend to us," says Egemen at Garanti.

Lower margins, longer tenors

Two trends are expected during the next wave of deals. Despite the likely resistance from lenders, pricing is expected to contract further, especially given the blowouts in the early part of this year. But there are disagreements as to how much. Akbank and Vakif, which both have loans maturing in August, are expected to be the next borrowers to come to market. Some bankers say they could obtain 125bp all-in for their one year money. Later in the year, spreads might fall further still. Garanti, for example, has a facility maturing in November and is confident it will be priced inside that level. "Margins are narrowing. Our recent loan could have been 125bp all-in," says Egemen. "But we didn’t want to push the market too much. The next deal later this year will be 100bp or close to it."

Some lenders are doubtful, however, saying that the recent rises in funding costs (dollar three month Libor rose from 25bp to 54bp in the 10 weeks to the beginning of June) will stop margins falling. "It’s their desire to get one year pricing of close to 100bp-125bp," says Singharay. "But the market is moving against that."

The other trend will be the lengthening of tenors. Turkey’s FIs have not been able to issue loans longer than a year since 2007. But Akbank and Vakif are both thought to want dual tranche one and two year facilities when they roll over August’s maturities. "Once the global financial markets reach pre-crisis levels we believe Turkish banks will return to longer tenor syndications," says Hulya Kefeli, executive vice president at Akbank in Istanbul. "In fact, as of today active players in the market are receptive to two year syndications."

But the lack of long tenors in the loan market — Turkey’s banks feel that, even at the best of times, they would be unable to get funding beyond three years — is pushing them towards other forms of borrowing. They have turned to multilateral lenders such as the European Investment Bank and World Bank for longer-term debt, says Yüksel at Vakif. But this type of funding is only for specific purposes, such as SME lending, which makes it restrictive. As such, Turkey’s banks long to tap the Eurobond and securitisation markets, both of which have been shut to them over the last 18 months.

The need is all the more pressing given that gross loans in Turkey are expected to grow by 10%-25% this year alone. The banks are creating a mismatch between their short-term liabilities and their assets, which are becoming longer-term as Turkey’s economy develops. "While liquidity isn’t a big issue, most of banks’ growth at the moment is dominated by SME and retail lending," says Finansbank’s Cinemre. "With the latter, we’re talking about mortgages going beyond five years or car loans of three years. So the balance sheets are being stretched out."

Time for bonds

Turkey’s banks are not wasting time, however. Several are expected to issue Eurobonds — which, for most, would be debut deals — before the end of the year. Akbank is predicted to be first up. Although it would not comment, it was understood to have mandated banks in May for a five year note of up to $1bn that could be priced as early as this month.

The deal, despite not even having been announced, was generating plenty of excitement in Istanbul in May. "All the Turkish banks will watch the first Eurobond because it will set the benchmark," says Cinemre. "If they like it, many others will also issue. But if it’s expensive, they won’t."

Pricing will almost certainly be the main sticking point, especially given that Turkey’s banks will not be able to cajole capital markets investors into lending at the same attractive rates that relationship banks are. "The banks will be very selective when it comes to Eurobonds," says Orgun at Fitch. "They wouldn’t issue at any price."

Turkey’s banks are not being unrealistic, however. Those that would look to follow Akbank — a group that includes Isbank and Vakif — realise that first-time borrowers cannot be too picky. "The price will be important. But for the first issue we won’t be too sensitive," says Demiray at Isbank. "We have to open the market for Isbank first and then we can maybe start pushing the price.

"Three years is the minimum tenor we’ll look for. If it were possible, we’d go for up to seven years. A reasonable amount would range between $500m and $1bn."

A logical step beyond Eurobonds would be to try and sell securitisations again. Turkey’s banks frequently securitised diversified payment rights (DPRs) before the crisis and would like to see that market, which can offer tenors up to seven years, open again. Bankers in Istanbul also talk of issuing existing-asset ABS in the near future and even covered bonds. Some will look instead to the local currency bond market. Turkish banks have traditionally been prevented from issuing lira notes by the Capital Markets Board. But many think such restrictions are easing. "We’re more likely to issue Turkish lira Eurobonds than foreign currency ones," says Egemen at Garanti. "At the moment liquidity is very much available. Deposit rates are low. So, as far as cost is concerned, it doesn’t make sense for us to borrow from the Eurobond market."

Debt markets their oyster

As for syndicated loans, most bankers think Turkey’s FIs will continue issuing them, even if they become regular faces in the bond and securitisation markets. "I don’t for a minute think they’ll replace loans with bonds," says an emerging markets banker in London. "They know the bond market is here today, gone tomorrow. They’ll want to keep their relationships."

Some even think there is untapped demand for Turkish FI loans among Asian banks. Turkey’s borrowers have attracted commitments from throughout Europe and the Middle East in the last year, and even such places as Brazil. But Asian lenders, increasingly prominent in western Europe’s loan market, have hardly featured. As such, some of the borrowers are thought to be considering visiting the likes of Hong Kong, Korea, Singapore and Taiwan to pitch themselves to the region’s banks.

But most Turkish FI borrowers say that the relative importance of loans will decline. "Turkish banks won’t eschew syndicated loans, given how vital they were as a form of funding last year," says Cinemre.

"But as Turkish banks access capital markets more for debt or equity, we might see the syndication deals becoming slightly smaller and the banks could limit themselves to tapping the market once, rather than twice, a year."

Whichever debt markets they choose to tap, Turkey’s borrowers are bound to find support. They benefit from the strength of the sovereign, whose economy is expected to grow by about 6% in real terms this year and which has a debt to GDP ratio of 49%, low by the standards of Europe. Moreover, the banks themselves are in enviable positions. They are well-capitalised — with a CAR of 19.95% at the end of March — have few bad assets and are able to source the vast majority of their funding from stable deposit bases. As Vakif’s Yüksel says of all Turkey’s banks: "In the last year, we have proved ourselves. There aren’t many borrowers out there that have come through the crisis this well." It is a message unlikely to be lost on global debt investors.

  • 10 Jun 2010

New! GlobalCapital European securitization league table

Rank Lead Manager/Arranger Total Volume $m No. of Deals Share % by Volume
1 Citi 7,171 21 10.82
2 Bank of America Merrill Lynch (BAML) 6,703 19 10.11
3 JP Morgan 4,776 10 7.21
4 Credit Suisse 4,718 9 7.12
5 Lloyds Bank 4,420 14 6.67

Bookrunners of Global Structured Finance

Rank Lead Manager Amount $m No of issues Share %
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1 Wells Fargo Securities 68,611.22 170 11.38%
2 Bank of America Merrill Lynch 59,056.08 169 9.80%
3 JPMorgan 56,861.85 163 9.43%
4 Citi 56,521.05 165 9.38%
5 Credit Suisse 44,888.95 123 7.45%